Balancing your fear and managing your emotions during a trade setup is not a simple process.
Last week's article – The Benefits of Active Trade Management – showed my four-step plan for handling trade management in detail. However, nothing beats seeing practical examples of applying theory.
That is why today I will be adding live examples of trade management from November 2017 and explaining my thought process during those setups.
EUR/AUD Setup: Example of a Fine Balance
The EUR/AUD 1-hour chart was showing strong bullish price action (blue arrows) and an equally strong oscillator push (purple box). The price started to make a bearish retracement, and I added a resistance trend line (dotted red line) to connect the tops. My long trade setup (green line) was triggered once broke above that resistance with a clear bullish candle (green arrow).
Step 1: Loose Management
My first focus is to be patient with the setup (purple 1). Trades can show indecisiveness at the start and do not have to immediately move into my desired direction. Generally speaking, I am more patient with trending trades than I am with reversal setups, because the price often tends to move with the trend, especially, if divergence is not visible.
Source: EUR/AUD 1-Hour Chart, from 13 November to 17 November 2017
Step 2: Tight Management
Eventually, there is a time where I become less patient with the setup (purple 2). If the trade has not yet hit my stop-loss, the price is either going sideways or moving into my direction. In both cases, I want to reduce the risk of this setup and move my stop-loss to a support (longs) or resistance (shorts) point.
Step 3: Loose Management
Now that the trail stop-loss has reduced the risk or even locked in the profit, I prefer to become patient again and give the trade some setup space for it to reach my original and intended profit target (purple 3).
Step 4: Tight Management
With the last step, I will again become less patient with the setup and will either try to lock in profit by using a trail or close the trade with a profit via an immediate market exit. Step 4 is triggered in three cases, when the price is:
- Taking too long before it hits the target;
- Very close to the target (tighten the trail stop-loss);
- Close to the weekend and I do not want to hold the trade over the weekend.
With the EUR/AUD example, I took a market exit (red line) as the weekend was approaching.
EUR/NZD Setup: Cutting Trades Too Early
The EUR/NZD trade had a similar analysis and management as the EUR/AUD, which is why I will not describe all the four steps here again. There was, however, one crucial difference: I moved the stop-loss earlier (from the orange to the red line) with the EUR/NZD long than the EUR/AUD setup.
My patience was limited with this setup due to a weekly resistance point but the strong uptrend did, however, break through this level. This example shows how cutting trades too early and moving the trail stop-loss too tightly can hurt the outcome. One trade will not matter that much, but regularly cutting trades early could impact your trading results negatively.
Source: EUR/NZD 1-Hour Chart from 10 November to 17 November 2017
EUR/NZD Setup: Cutting Losses Short
Here is another EUR/NZD example, but in this case the trade was cut short in a correct way. The bearish breakout and entry (green arrow) occurred below a support trend line (dotted blue) within a larger downtrend (moving average).
The setup seemed fine at the start, and the price continued quickly in my direction. Remember that I am looking to give a setup more space at the very start. Eventually, however, the price kept moving sideways and a larger correction appeared. This is the moment where I want to either lock in some profit or keep the loss small.
At this point I moved the stop-loss to above the most recent top (red line) and was able to substantially reduce the risk of this setup to a fraction of the original risk. The risk was cut by 75% as the stop-loss size was not 100 pips but now 25 pips.
Later on, the price indeed moved higher, and the rule of cutting losses short and keeping them small proved golden. All trades that close for a small loss rather than a full loss add up and allow traders to get a much better reward-to-risk ratio.
Source: EUR/NZD 1-Hour Chart, from 30 October to 13 November 2017
GBP/NZD: Letting Winners Run
Last but not least, once a trade setup is moving into your direction, it becomes appealing to take the profit and close the trade before your actual target gets hit. The mind is often a trigger for this behaviour because you start to think about scenarios where the price reverses against your position and direction.
This is one of the reasons why I personally use an active trade management style and eventually move the trail stop-loss to reduce the loss or lock in profit.
With the GBP/NZD setup below, I entered a bullish breakout. The trade continued more or less immediately upwards, but failed to hit the Fibonacci targets. Rather than cutting the winner short, I prefer to find a good moment and spot to move the trail stop loss. Once price bounced upwards I decided to move the trail continuously (red lines).
Source: GBP/NZD 30-Minute Chart, 26 October to 2 November 2017
The main conclusion is that traders need to focus on letting winners run and cutting losses short, not on every single trade, but keeping them in mind as a long-term objective.
My trade management methods help me better achieve these dual goals of letting winners run and cutting losses short, but everyone should develop their own best practices and see what works for them in the most effective way possible.
Wishing you happy trading,